The birth of SEIS
Another major change came in 2012 with the introduction of EIS’s little brother/sister, Seed Enterprise Investment Scheme (SEIS). SEIS targeted seed funding for very early stage businesses, effectively startups, and proved so popular it was made permanent in 2014. SEIS was an acknowledgment of the success of EIS. It cemented the Government’s commitment to the schemes and to equity funding to start and scale-up businesses. Despite many changes in personnel at Government level since then, the scheme’s success means they continue regardless.
The capital preservation period
With so much change in such a short period of time, the one thing the industry now yearned for was a period of consolidation and stability and this duly followed for the next couple of years. In the meantime, an undercurrent was slowly building within EIS and the newly formed SEIS. With the withdrawal of FITs and energy generation as an investment, fund managers seeking to replicate these so called “capital preservation” assets and buoyed by their popularity with investors (capital preservation is a catch all term for an EIS investment that is focused on mitigating risk usually through a combination of the EIS tax reliefs and another stable source of income or other form of available tax relief. Often by adopting this approach, the fund could be promoted as “assuring” an investor that in the region of 60-80p of their £1 investment was “backed” by the income/tax relief meaning only a small percentage of their investment was actually at risk) found increasingly ingenious ways of doing so. The rise in funds being diverted to these types of investment began to catch the eye of HM Treasury who became increasingly of the opinion that such investments were not within the spirit of EIS.
Hello Patient Capital Review
This culminated with the Patient Capital Review being announced in 2016 and undertaken in 2017. The review’s overriding aim was to strengthen the UK further as a place for growing innovative firms to obtain the long-term ‘patient’ finance that they need to scale up. However, a large microscope was also placed on the role of tax-advantaged investment within the early-stage funding ecosystem and in particular, capital preservation EIS funds. At the time, EISA worked tirelessly with HMT to help them understand the funding environment. Indeed, the majority of our recommendations were taken up by the review and subsequent legislation, ultimately resulting in the Risk to Capital condition. This is a principles-based condition that depends on taking a ‘reasonable’ view as to whether an investment has been structured to provide a low-risk return for investors and ensures that a company in which the investment is made must have objectives to grow and develop over the long term.
In short, the risk to capital condition was a return to the original intention of EIS and enshrined the idea of the spirit of EIS into actual legislation. From now on, only companies with significant growth plans would receive funding and every £1 of an investor’s money would need to be at risk to help fund that growth. SEIS and EIS’s reaffirmed role was to fund the next generation of exciting, growth- orientated, tech-focused early stage UK businesses.
So, we have almost come full circle. The last 10 years have been a bit of a rollercoaster for EIS. Indeed, in my first year alone as EISA Director General, I faced up to challenges from Brexit, the aforementioned Patient Capital Review (which as the time was a huge threat to the very existence of EIS) and Trump being elected US President! It was certainly a baptism of fire and that’s before we even get to Covid in 2020! As I’ve talked a lot about Covid and the pandemic’s effect on EIS previously in previous articles for IFA Magazine, I opted not to cover it here.
However, as we sit here in 2021, it feels like EIS is in a good place despite the pandemic. There’s a lot of positivity in the industry; investors are investing, innovative, exciting companies are being built and I’m absolutely convinced the next wave of big companies to come out of the UK will be SEIS and/or EIS funded.
We have already seen the likes of Revolut, Charlotte Tilbury, Cobra beer and Eve Mattresses come through the EIS path and that’s just to mention well known product names. There are also a whole raft of life science and medtech businesses you would be less familiar with but which are equally successful both financially and in improving the quality of our lives.
So, when IFA magazine reaches its 20th anniversary, I will be back again to tell you about all the EIS and SEIS funded unicorns and decacorns you missed out on!
About Mark Brownridge
Mark has over twenty years’ experience in financial services and prior to becoming Director General of the EIS Association, he was Head of Research and Development at Mazars, a leading UK financial planning firm. Mark is highly qualified being a Certified Financial Planner, Chartered Financial Planner, Chartered Wealth Manager and Fellow of the PFS and also sits on the CISI’s Accredited firms committee and TISA’s Distribution Policy Council. Mark’s involvement with EIS began 8 years ago and he has since championed EIS investing within a financial planning context and is extremely passionate about promoting the industry, increasing its effectiveness and ensuring the private sector continues to drive much needed funding to small companies.
